Could the State of NC set up a nonprofit corporation to issue tax-exempt Certificates of Participation to buy prison facilities, where the lease payments back the bonds?
Plain-English summary
In 1999 NC's legislature passed S.L. 1999-237 § 18.20(a) (later codified at N.C.G.S. § 148-37(b1)), authorizing the Secretary of Correction to contract with private firms for the construction of three close security prisons (totaling up to 3,000 cells). The Department of Correction would operate the facilities and lease-purchase them from the contractor over up to 20 years. The Department of Treasurer then proposed a more sophisticated financing structure designed to drop the State's effective borrowing cost: a State-identified nonprofit corporation would buy the completed facilities from the contractor and issue tax-exempt Certificates of Participation (COPs) backed by the State's lease payments, then lease the facilities to the State.
Robert L. High asked the AG two questions about that arrangement. Senior Deputy AG Reginald L. Watkins and Special Deputy AG Roy A. Giles, Jr. wrote the response.
Q1: Does public bidding under Article 8 of Chapter 143 apply to the construction?
A: No. Article 8 of Chapter 143 applies to public construction or repair "involving an expenditure of public money" (§ 143-129(a)). § 148-37(b1) clearly contemplates that the private sector will build the facilities using private funds, and only later lease them to the State. No public money is being spent on the construction itself; the public money flows only when the State starts paying lease installments. Article 8 doesn't reach the construction.
Q2: Is the proposed State-formed nonprofit / Certificates of Participation financing structure authorized by § 148-37(b1)?
A: No. § 148-37(b1) is silent on how the State will fund its eventual purchase. The statute talks about contracts with private firms for construction and a lease that contains a purchase schedule. It doesn't authorize the State to stand up a captive nonprofit corporation under Chapter 55A, have that nonprofit buy the facility from the contractor on completion, have the nonprofit fund that purchase by selling its right to receive State lease payments (the COP offering), and then lease the property back to the State. That whole structure would let the State indirectly issue tax-exempt debt against itself without the constitutional and statutory safeguards that ordinarily attach to State borrowing.
Why this mattered. The Treasurer's financing structure was a workaround. Direct State borrowing (general obligation debt) requires voter approval under the NC Constitution. Lease-purchase financing through a captive nonprofit is the standard "Certificates of Participation" structure used in many states to fund capital projects without voter approval. The AG concluded that for NC, that structure required express legislative authorization, not implication from a general lease-purchase statute. The legislature would have to go back and add that authority.
§ 148-37(g) comparison. The AG noted that § 148-37(g) authorizes the Secretary of Correction to contract with private firms for the operation of confinement facilities, but specifically conditions that authority on appropriations from the General Assembly. The mention of nonprofit firms in § 148-37(b1) didn't carry similar implications for State-controlled nonprofits or for tax-exempt financing structures. The legislature spelled out what it wanted to authorize, and the COP-via-State-nonprofit structure was not within the text.
The practical effect: NC's Department of Correction had to either rely on direct State appropriations for the eventual purchase, restructure the deal, or wait for the legislature to authorize the COP financing approach.
Currency note
This opinion was issued in 2000. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here. NC's COP and lease-purchase financing law has evolved considerably since 2000. The General Assembly has authorized specific COP structures for various state projects in subsequent session laws. § 148-37 has been amended. Anyone designing a similar transaction today should look at current statutes, current AG opinions, and the current bond counsel landscape.
Background and statutory framework
The text of § 148-37(b1). The statute authorized the Secretary of Correction to enter contracts with private for-profit or nonprofit firms for construction of three close security correctional facilities (totaling up to 3,000 cells) to be operated by the Department, pursuant to a lease with a purchase schedule over up to 20 years. The Secretary could issue an RFP for plans developed by the Department and reviewed by the Office of State Construction. The Department of Administration would make the final award after consultation with the appropriate legislative oversight committees. The Office of State Construction was required to inspect and review each project during construction.
The Treasurer's proposed structure. The Department of Treasurer proposed to implement § 148-37(b1) through the following sequence:
1. DOC prepares plans for each prison.
2. Office of State Construction reviews and approves plans.
3. DOC prepares RFPs for construction and construction financing.
4. After consultation with the legislative oversight chairs and Senate/House Appropriations Subcommittees on Justice and Public Safety, the Department of Administration makes the final award, subject to Council of State approval after consultation with the Joint Legislative Commission on Governmental Operations.
5. A State-identified nonprofit corporation enters a commitment to purchase the facility from the contractor upon completion at an agreed price.
6. The State enters a commitment to lease the facility from the nonprofit upon completion.
7. The State leases land to the contractor.
8. The contractor funds construction (with its own financing as needed) and builds.
9. The Office of State Construction inspects during construction.
10. The nonprofit purchases the facility on completion.
11. The State leases the facility (with a purchase schedule) from the nonprofit.
Construction would be paid for by the contractor; the nonprofit's purchase would be funded by selling rights to receive State lease payments (the COP offering). State lease payments would repay the COP investors. The nonprofit would be a limited-purpose Chapter 55A entity with a volunteer board recruited by State officials, existing solely to facilitate the financing.
Public bidding (Article 8, Chapter 143). Applies only to public construction or repair "involving an expenditure of public money" (§ 143-129(a)). The AG read § 148-37(b1) to contemplate that private parties construct the facilities at their own expense, with the State stepping in only via the eventual lease and purchase. No public-money expenditure on construction, so no Article 8 trigger.
Lease-purchase and certificates of participation. A standard public-finance technique where a public entity leases a facility from a separate party and uses lease payments to back tax-exempt securities issued by that separate party. The constitutional value of the structure is that the lease is generally treated as a non-debt obligation (subject to annual appropriation), so voter approval for debt is not required. Many states allow this; others restrict it. The AG opinion concluded that NC's statute did not authorize this specific kind of structure for these specific prison facilities.
Office of State Budget and legislative drafting intent. The AG noted that before the opinion was requested, a meeting was held between the requestor's office and representatives of the Office of State Budget, the Department of Correction, the State Property Office, and the AG. The Office of State Budget consulted with the legislative drafting staff and was advised that the intent of § 148-37(b1) was a "turn key" project: the private sector would finance, construct, and lease the facilities to the State with a 20-year purchase option. The legislative intent was not to authorize the COP-via-State-nonprofit structure.
§ 148-37(g). The AG cited § 148-37(g) as a comparator: it authorizes contracting with private for-profit or nonprofit firms for the provision and operation of certain confinement facilities, but the authority is "specifically made subject to the appropriation of funds for this purpose by the General Assembly." The General Assembly knew how to grant explicit contracting authority subject to appropriation, and chose not to extend it to the captive-nonprofit COP structure.
Common questions
Q: Was the prison construction itself subject to NC public bidding law?
A: The AG concluded no. Article 8 of Chapter 143 applies only to public construction involving public money. § 148-37(b1) contemplates private-sector construction with private funds. The lease-purchase arrangement is what brings the State in, not the construction itself.
Q: Could the State have moved forward with the COP financing anyway?
A: The AG concluded that doing so would have required additional legislative authorization. § 148-37(b1) didn't authorize a State-formed Chapter 55A nonprofit to buy the facility from the contractor on completion and issue tax-exempt Certificates of Participation backed by State lease payments.
Q: Why couldn't the State just rely on the general lease-purchase language in § 148-37(b1)?
A: The AG read § 148-37(b1) to authorize a direct lease-purchase from the private contractor or any other private firm that owns the facility, but not an indirect arrangement where the State stands up its own captive nonprofit to take the COP debt off the State's official books while still being economically the same as State borrowing.
Q: Could a private contractor (not a State-formed nonprofit) have issued the COPs?
A: The opinion doesn't squarely address that. The structure the Treasurer proposed specifically involved a State-formed Chapter 55A nonprofit with a volunteer board recruited by State officials. A truly private contractor financing its own construction and selling its own securities, then leasing the completed facility to the State, would be a different question.
Q: Why was the COP route attractive?
A: Tax-exempt status. A captive nonprofit issuing COPs backed by State lease payments could borrow at tax-exempt municipal rates, lowering the State's effective financing cost. The AG didn't dispute that the structure would save money; the issue was whether the General Assembly had authorized it.
Citations from the opinion
- N.C. Gen. Stat. §§ 143-128, 143-129(a), 146-37, 148-37(b1), 148-37(g)
- Article 8 of Chapter 143 of the General Statutes
- Chapter 55A of the General Statutes (nonprofit corporations)
- S.L. 1999-237, Section 18.20(a)
Source
Original opinion text
Reproduced from the NCDOJ landing page. The linked landing page is authoritative.
Re: Advisory Opinion; Close Security Prison Construction; S.L. 1999-237, Section 18.20(a); Article 8, Chapter 143 of the General Statutes; Purchase of Prison Facility by Non-profit Corporation Established by the State
Dear Mr. High:
This letter responds to your request for a legal opinion involving an interpretation of N.C.G.S. § 148-37(b1) which reads as follows:
(b1) The Secretary of Correction may enter contracts with private for-profit or nonprofit firms for the construction of three close security correctional facilities totaling up to 3,000 cells to be operated by the Department pursuant to a lease that contains a schedule for purchase of the facilities over a period of up to 20 years. The Secretary may issue a request for proposals for the construction of such facilities in accordance with plans and specifications developed by the Department and reviewed by the Office of State Construction. The request for proposals shall provide for the option of bidding on one or more of the facilities, and shall require each bidder to provide a separate bid on a single facility of up to 1,000 cells.
The Secretary of Correction, in consultation with the Chairs of the Joint Legislative Correction and Crime Control Oversight Committee and the Chairs of the Senate and House Appropriations Subcommittees on Justice and Public Safety, shall make recommendations to the Department of Administration on the final award decision.
The Department of Administration shall make the final award decision, and the contract shall then be subject to the approval of the Council of State after consultation with the Joint Legislative Commission on Governmental Operations.
Contracts made under the authority of this subsection shall provide that the Department of Correction shall furnish the plans and specifications for these correctional facilities to the Office of State Construction for its review and that the Office of State Construction shall inspect and review each project during construction to ensure that the project is suitable for use as a correctional facility and for future acquisition by the State.
Your letter indicates that the Department of the Treasurer has proposed to the Department of Correction and the Department of Administration a method of implementing the referenced statute by which the State can reduce lease/installments payments through lower interest costs. To implement these provisions for construction with financing at tax-exempt rates, the following process would be followed:
- The Department of Correction prepares plans for each prison.
- The Office of State Construction reviews and approves plans.
- The Department of Correction prepares RFP's for construction and construction financing.
- The Secretary of Correction, in consultation with the Chairs of the Joint Legislative Correction and Crime Control Oversight Committee and the Chairs of the Senate and House Appropriations Subcommittees on Justice and Public Safety, make recommendations to the Department of Administration on the final award decision. The Department of Administration makes the final award decision, and the contract is then subject to the approval of the Council of State after consultation with the Joint Legislative Commission on Governmental Operations.
- A State-identified non-profit corporation enters into a commitment to purchase the facility from a contractor upon completion at agreed upon price.
- The State enters a commitment to lease the facility from the non-profit corporation upon completion of construction.
- The State leases land to the contractor.
- The contractor funds construction costs and, as necessary, arranges for its own construction financing.
- Construction begins.
- The Office of State Construction inspects and reviews each project during construction to ensure that the project is suitable for use as a correctional facility and for future acquisition by the State.
- The non-profit corporation purchases the facility from the contractor upon completion of construction.
- The State leases the facility (with an accompanying purchase schedule) from the non-profit corporation.
The facility construction costs will be financed by the contractor. The purchase by the non-profit corporation will be financed by its selling its rights to receive lease payments from the State (a Certificate of Participation offering). The State's lease payments will be used by the non-profit corporation to repay its borrowing. The nonprofit corporation will be a limited purpose, non-profit corporation, created pursuant to Chapter 55A with a volunteer board of directors, solicited by the Director of the Budget, the Secretary of the Department of Correction, and other interested State officials. The corporation will exist solely to facilitate the financing and will have no substantive operations or obligations with respect to the facility.
In light of the General Assembly's enactment of N.C.G.S. § 148-37(b1), you raise two questions. Those questions and our responses are as follows:
QUESTION 1: Is the facility construction subject to the requirements of G.S. 143-128?
ANSWER: NO.
We understand your first question to be whether the public bidding requirements of Article 8, Chapter 143 of the General Statutes, would be applicable to the construction of the three close security correctional facilities authorized by N.C.G.S. § 148-37(b1). Both this statute and the factual scenario set forth above clearly contemplate that such facilities will be constructed by the private sector using private funds. Article 8, Chapter 143 of the General Statutes, is applicable only to public construction or repair projects involving an expenditure of "public money." See N.C.G.S. § 143-129(a).
QUESTION 2
ANSWER: We find nothing in N.C.G.S. § 148-37(b1) which either expressly or by implication authorizes the State to establish a non-profit corporation to finance by selling tax-exempt Certificates of Participation a purchase of the prison facilities immediately upon completion of construction by a private firm.
N.C.G.S. § 148-37(b1) does not address the issue of how the State will fund the purchase of any facilities constructed pursuant to the statute. The statute, in pertinent part, provides that the Secretary of Correction may enter into "contracts with private for-profit or nonprofit firms for the construction of three close security correctional facilities . . . to be operated by the Department pursuant to a lease that contains a schedule for purchase of the facilities over a period of up to 20 years." The last paragraph in the statute further provides that the Office of State Construction will be responsible for reviewing the plans and specifications for the correctional facilities and shall inspect and review each project during construction to ensure that the project is suitable for use as a correctional facility "and for future acquisition by the State."
We interpret this language to mean that it would be the responsibility of a firm in the private sector to finance, construct and lease the prison facilities in question to the State. It is our understanding that this interpretation is consistent with interpretations of this provision by both the Office of State Budget and the legislative fiscal research staff responsible for drafting this provision.
Prior to your request for this opinion, a meeting was held between you and representatives from the Office of State Budget, Department of Correction, State Property Office, and this office. During this meeting, a question was raised as to whether N.C.G.S. § 148-37(b1) authorizes the establishment of a non-profit corporation as outlined above for the purpose of financing the purchase of the constructed prison facilities through the issuances of tax-exempt Certificates of Participation. It was decided during that meeting that the Office of State Budget would consult with the legislative staff personnel responsible for drafting this statute regarding the intent of this provision. It is our understanding the Office of State Budget was advised that it was the intent of this provision to provide for "turn key" projects in which a firm or firms in the private sector would be responsible not only for financing and constructing the facilities but also leasing same to the State with a provision allowing a purchase of the facilities over a period of up to 20 years. It is also our understanding that the Department of Correction and the State Property Office are currently drafting a request for proposal (RFP) form which is consistent with this interpretation. The statute does not authorize the State either directly or indirectly to finance an acquisition of the facilities as outlined above.
It has been suggested that the authority to finance an acquisition of the correctional facilities as outlined above may be implied from the authority to contract with "nonprofit" firms in the first sentence of the statute. By its express terms, the first sentence merely authorizes the Secretary of Correction to contract with private firms "for the construction" of correctional facilities. As stated above, the statute does not address the issue of funding with respect to the acquisition of the facilities. We note that N.C.G.S. § 148-37(g) authorizes the Secretary of Correction to contract with private for-profit or "nonprofit" firms for the provision and operation of certain confinement facilities. The authority of the Secretary of Correction to enter contracts under this subsection is specifically made subject to the appropriation of funds for this purpose by the General Assembly. See N.C.G.S. § 146-37(g).
In conclusion, the provisions of Article 8, Chapter 143 of the General Statutes, are not applicable to the construction of the correctional facilities authorized by N.C.G.S. § 148-37(b1). Furthermore, we find no authority in the present statute for the Department of Correction, or the State, to establish a non-profit corporate entity to finance the purchase of the completed prison facilities through the issuance of taxexempt Certificates of Participation and then lease the facilities to the State pledging the lease payments as security to repay funds borrowed by the corporate entity. Financing the acquisition of prison facilities by this means would require further legislative authorization.
Signed by:
Reginald L. Watkins, Senior Deputy Attorney General
Roy A. Giles, Jr., Special Deputy Attorney General